Tradable and Non-tradable Inflation in Turkey: Predicting Different States with Markov Regime-Switching Approach

The recent literature debates the significance of different regimes of inflation and trade linkages in explaining the relationship between inflation and alternative reference indicators. This paper contributes to this literature in several respects. First, it explores which states of the reference indicators are more related with low, normal or high regimes of inflation. Second, it takes globalization into account and performs the analysis for goods and services in the consumer basket classified with respect to their trade openness and content of intermediate imports: tradable/non-tradable items and items with low/high imported intermediate share. It applies Markov regime-switching models to determine the states of inflation and reference series then compare probability scores of matching different regimes of inflation and different regimes of reference indicators. Third, it computes Consumer Price Indices in tradable/non-tradable and low/high imported intermediate details for an emerging country, Turkey which distinguishes from the others with high trade openness, high global integration rate and implementation of inflation targeting regime.